Melexis N.V.

Thank you. Dear audience, thank you for joining the Melexis Q3 2024 earnings call.

In Q3, our sales reached €247.9 million, which is within our guidance. It’s in line with the Q3 of last year and it represents a 1% increase from Q2 to Q3 this year.

This being said, next to the solid sales in Q3, discussions with our automotive customers starting in September indicate that, based on their current order book for the balance of 2024, they would end up with higher inventories than desired. During the past couple of months, we have already had announcements about the auto industry, with global car production down by more than 5% in Q3 2024.

Our current order book would result in sales for Q4, which is in line with our full year guidance of around €1 billion. However, we have decided to assume this inventory correction at our customers, which will lead to lower sales for Melexis in Q4.

Where we previously worked to avoid bullwhip effect, we now recognize that we would not present it fully and thus we are also impacted. The inventory correction that Melexis decided to assume in Q4 follows a period of supply allocation and is centered on automotive customers in Europe and in the U.S.

Based on what we know today, global automotive sales and production are forecasted to grow in 2025. We anticipate that taking such inventory correction now will enable us to resume our growth trajectory sooner than it would otherwise be the case.

It also shows our customer orientation and it provides clarity to our stakeholders. Typically, such inventory corrections are followed by a new upturn in demand, for which we are already preparing.

Returning to Q3 2024, our performance was mainly driven by our magnetic position sensors, both in automotive and Beyond Automotive applications. We also had growth in pressure sensor, sensor interface and current sensor.

In the third quarter of 2024, Melexis has continued to introduce several innovations. For example, we have expanded our Sensor portfolio, we have continued to address safety requirements with our Triaxis magnetic product for improved steering and pedal position application.

We have also launched the Triphibian pressure sensor with a digital output designed for thermal management of electric cars. And we have enhanced our current sensor, improving both isolation capabilities and functional safety compliance for demanding automotive applications.

In Q3, we had also encouraging number of design wins with an increasing amount realized in APAC and in particular in China. Those are some examples of design wins concluded in Q3.

We had an important design win for embedded motor driver for EV powertrain in China and another one for HVAC application in Japan. We had also multiple design wins for embedded lighting application in Europe and also in China.

These examples demonstrate that we continue to win business globally and this is across the automotive platform and irrespective of the type of powertrain. Now, I will hand it over to our CFO, Karen van Griensven, who will share some financial insights.

Thank you, Marc. So, hello everybody.

A bit more on the financial results for the third quarter. So, the sales came out at €247.9 million, stable versus the same quarter of the previous years and an increase of 1% compared to the previous quarter.

The euro-U.S. dollar exchange rate evolution had no impact compared to the same quarter a year ago and a negative impact of 1% compared to the previous quarter.

The gross result was €108.2 million or 43.7% of sales, a decrease of 5% compared to the same quarter of last year and stable compared to the previous quarter. R&D expenses were 10.7% of sales, G&A was at 5.1% of sales and selling was at 1.9% of sales.

The operating result was €64.2 million or 25.9% of sales, a decrease of 10% compared to the same quarter of last year and stable compared to the previous quarter. The net result was €51.2 million or €1.27 per share, a decrease of 10%, compared to €56.8 million or €1.41 per share in the third quarter of 2023 and an increase of 4% compared to the previous quarter.

Now looking further ahead, Melexis expects sales in the fourth quarter of 2024 to be in the range of €200 million to €210 million. For the full year 2024, Melexis expects sales to be around €935 million to €945 million, previously around €1 billion, with a gross profit margin above 43%, previously above 44%, and an operating margin above 24%, previously above 25%, all taking into account a euro-U.S.

dollar exchange rate of 1.08 for the remainder of the year. For the full year 2024, Melexis expects CapEx to be around €60 million.

Operator, you can now open the Q&A session.

Yeah. Hi.

Thanks for letting me on. My question is, you’ve talked about in your release that you’re seeing some kind of inventory correction at some customer or customers.

Could you talk about how many customers you’re seeing this trend at at this point and how long do you expect it to continue into 2025 or this is -- do you expect this to be just a fourth quarter phenomenon? And I have one quick follow-up after that.

Yeah. I think what we see for the pushout is that, it’s coming from our European customers and U.S.

customers, but it does not come from China or from Asia. I would say also it doesn’t come from our distributor.

We have, let’s say, 30%, 35% of the revenue coming from distribution and we don’t receive pushout requests from those channels. In summary, it’s coming from the European customer.

And do you expect this to continue pushing out in the first half of next year or do you expect that this is it now and there won’t be any further pushout from here?

We don’t have indication that this inventory correction that we are now digesting will continue in 2025. But we also don’t have clear indication that it will not continue.

I mean, it’s a bit -- there is uncertainty, because now we are digesting those inventory corrections. But as I mentioned, we don’t have indication that it will continue.

Understood. Thank you so much.

Yes. I would like to focus on the non-automotive part.

Also, there we see a below par performance compared to the Capital Market Day indications over in the longer run until 2030 and it was indicated that you would see their growth of close to 15% CAGR. Now, given the numbers, you’re hinting at 7% to 8% for this year.

Can you indicate what’s happening there? Thank you.

Yeah. We confirm indeed that over the long-term, we will grow by at least 15% for the Beyond Automotive.

But in order to reach this growth, we need to develop the product and then to market the product, and to have a design win for the customer. And now we are indeed in this process to develop and to release the product.

As an example, in 2024, we will release five Beyond Automotive products, for example, for some robotic applications and those are -- those products that will generate the growth in the future.

And these new Beyond Automotive products, can you give some indications what kind of products are?

Yes. And for the time being, we are in development.

We are working a lot on the robotic application. It’s products that we use in the joint of the robot, as an example, either the position sensor to measure the position of the joint or driver in order to actuate the joint.

This is, let’s say, for the robotic. And also you know that we have released recently what we call the Tactaxis, which is a tactile sensor in order to give the sense of touch of the robot and this is for the robotic aspect.

We are also developing specific products for the alternative mobility, mainly for the e-bike or for the motorbike and a bit longer term, because it will be released a bit later. But we are also working on what we call digital health and bi-sensing impact.

But in the order of the release, it is first robotic, then alternative mobility and then the digital health biosensor.

Yeah. We also had a launch of a product for the service, I think, in the first half of the year, where we have the first design win.

Yes.

So that is a product that is already launched and the pipe is filling with the first design now in the third quarter.

Exactly. It’s a driver used in the server, the big data server?

Yeah.

Yes. Good morning.

Thank you. And just the first one on the gross margins.

I think, based on the new your outlook for 2024, it appears that you are sort of expecting a 2-percentage-point to 3-percentage-point decline in gross margins sequentially in Q4. Could you talk about the moving parts for that decline?

Is that entirely volume-driven or is all pricing coming in lower than what you initially expected? And with regards to the diversification of the foundry partners, to what degree could that already have somewhat of an impact in Q4, but also in 2025?

Yeah. The reason of the slightly lower GPM now is, there are multiple reasons that are all coming together.

We still don’t have a perfect cost of yield or perfect yield for our innovative product and we are working on it in order to improve it. But for the time being, we are still impacted by this low yield.

Yeah, there is also the gold price adder, which is working against us, because we need to pay a price adder to the assembly house, depending on the gold price. There is also the re-evaluation of the inventory.

Yes. There were many small cost adders in the curve.

There is not one, strong one. It was many smaller, of which actually Marc actually mentioned the most important ones.

But indeed, it spread over many different small reasons why actually the gross margin was slightly lower than in the previous quarter. But this can be very different quarter-on-quarter, actually.

There is also the lower volume, which is playing an effect.

Yeah. Which is clearly temporary.

Also, cost of yield is supposed to increase or improve in the next year.

Okay. Thank you.

And then, just on China, I think, in terms of the geographic performance, also APAC improved. You mentioned strong traction with design wins in China.

Could you maybe provide more insight into the type and scale of opportunities you see in that market? Thank you.

Yes. First of all, indeed, during the first nine months of 2024, the China revenue -- the revenue coming from China has increased by 9%, while overall we are close to flat.

But in China, it has increased much more than for the overall Melexis. And in terms of design win and opportunity, it is increasing quarter-after-quarter.

And now we have indeed, it’s one of the main regions in terms of design win and opportunities is China. And as I mentioned also at the beginning, yeah, we did not receive push out from China.

Okay. Thank you.

And it shows, I think, that China is a strong region for Melexis. No push outs, high increase and a very, very healthy design win and increase of opportunity in the pipe.

Thank you very much. Just wanted to come back to some of the questions on the inventory correction into next year.

I mean, if we look in the past, when the inventory correction happened, 2019 as an example, it rarely happens for only one quarter. It lasts -- it’s a one-year process to digest all inventories.

And I was wondering why it would be different this time, if you think that it can be only one quarter and why it took so long for Melexis specifically to see this down cycle versus many other products. So that’s my first question and I have a follow up, if that’s okay.

Yeah. Why it took so long?

As a matter of fact, let’s say, we had LTA with our customer and I think the LTA has blurry a bit the picture. Yeah, we were also -- we stay longer than other in allocation on some products, and probably, it has also influenced the behavior of our customers.

And I think as you know, it’s a bit more in general. Yeah, some important platform has been pushed out by the OEM during the last six months to nine months, and I think those push out of those platform explain also why our customer wants to get a more healthy inventory at the end of the year.

And why would you suggest only one quarter? I mean, if you look in the past, it’s usually a much longer process than one quarter.

So why would that be different this time?

When we discussed with our customer and we discussed since in September on this aspect with our customer that they all mentioned that with those push out, they come back to a healthy inventory situation at their hands. I can just repeat what the customer told us.

Okay. Thank you, Marc.

And maybe my follow up is on pricing. Obviously, we are in this end of the year negotiation period.

We hear that autos, I mean, makers are obviously in struggle, asking for a lot of discounts. How should we think about the pricing next year for Melexis?

How do you feel about the pricing negotiation right now in the current environment?

Yeah. We are indeed in the middle of the prices negotiation.

It has not been finished. I would say, yeah, the volume is a question that there is indeed always a correlation, let’s say, between the volume and the pricing, which increase complexity.

We have the LTA, which is still valid for 2025, which we need also to take into account in the pricing negotiation. And all those parameters are playing a role.

Of course, we know that, yeah, we cannot really enforce the LTA. But I think it’s a good basis for discussion on the price.

From what I see, we will have a price reduction, which is similar to what we had before COVID.

A lot more. You don’t see more pressure than usual into the pricing, mainly because of LTAs?

Yeah. As I mentioned, there is indeed, as usual, a lot of expectation.

But on the other hand, we have our innovative products, which are really bringing new features on the market. Yeah, there is the volume, which is part of the discussion and we have our LTA as a basic.

And all in all, I do believe we will reach the usual price reduction at the end of the year.

Understood. Thank you very much.

Yes. Thank you.

I want to come back on the inventory correction, just to make sure that I fully understand it. I think you said that without the inventory correction, you would end up at the guidance range.

So that means that the inventory correction is something like €60 million pushed out from the fourth quarter. And then you mentioned that you assume that it will happen.

I’m not sure if I understand that word correctly, because I would think that this is based on the orders that you receive from the client. So what is the part that you assume or could it still be different from that €60 million push out that you expect?

What we mean is we add order in order to reach indeed the Q4 result. But the customer has sent the order to Melexis in the past and we have the order.

But now that the customer asked us to push out of Q4. And when we mean we assume, it means that we have decided to accept those requests.

Okay. Okay.

Okay. Got it.

And then the second one is also going back on the price discussion. You said there’s a correlation between volume and price.

I assume that you mean that whenever volume is high, the price is better or the other way around. But I can also think that at the current market where inventories at the clients are still relatively low and they really have to look at it then.

I mean, actually, what they probably will is lower volume and lower price, or is that not the way to think about it?

Yeah. It’s always indeed.

The objective, let’s say, of Melexis is indeed to optimize the revenue and at the same time to optimize our profitability. And the negotiation is indeed always how can we find this optimum between the volume of next year and the right profitability.

Okay. Okay.

Thank you.

Good morning. I have a follow-up question on the LTAs for 2025 and the line was a bit blurry, so I missed some of it.

So I hope I don’t ask something that has already been answered. Could you indicate roughly how much of the volume for next year is covered by LTAs?

And will those LTAs end in December 2025 or is there still a till in 2026?

The vast majority of the LTAs end in 2025. We have with some customers LTAs that are a bit longer, but the majority is in end of 2025.

The problem is the volume that are, let’s say, written in the LTA are far to be not realistic versus the current situation. The LTA has been signed, if you remember, in end of 2022, for 2023, 2024, 2025, and in 2022, we were in the middle of the chip shortage.

And then the customer has signed LTA with very, very high volume, which is, as a matter of fact, not valid now. I cannot answer your question because I think it’s indeed not relevant anymore.

And that’s why I mentioned…

Okay.

… we are using this LTA in our price negotiation.

Okay. I understand basically the contracts were much higher than what you expect to be shipping in Q4, Q1 and so on.

But would you say that half your customers have an LTA or is that also difficult to answer how that works out?

40%.

Yeah. Indeed.

What we have in the LTA is a bit more than 40% of the volume.

Okay. Clear.

Thanks. I have two tiny questions, so hopefully I can do two instead of one.

The first one, what are the forecasts from Standard & Poor’s for growth in car production next year and do they also have something about the mix change next year?

Yeah. The IHF forecasts 2% global car production increase in 2025 versus 2024.

And do they have a strong mix change from ICE to hybrid and EV, or is it a modest growth and penetration of those two categories?

I don’t have exactly the information, the last information from IHF in front of me.

Okay.

No. But it’s more in China than for the rest of the world.

So in China, it’s in general more easy.

Well, geographically, China is increasing more than the rest of the world.

Okay. That indeed suggests where the mix is heading.

That’s clear. And the second tiny question, I noticed in the balance sheet that the prepayments have gone down by €20 million.

Is that going forward the run rate for every quarter?

Can you repeat the question?

Yeah. I noticed in the balance sheet that the prepayments to your supplier have decreased by €20 million versus last quarter?

Yeah. But that -- you see an increase in the short-term current assets and that is really -- it’s moved from…

Okay.

… short-term, but the total is still the same.

Okay. So, actually, there have been no…

No.

… prepayments coming back to you?

No. That is for 2025.

2025.

The contract is so good that in the second half of 2025, we will see repayments by our supplier.

And is that a level of payments of, say, €15 million or €20 million every quarter, the same amount or is it -- will it fluctuate strongly?

It will be a fixed amount per quarter. Yeah, it’s quite fixed.

There are two contracts. In 2025, it’s the first contract on which we will have repayments.

I think in the range of €16 million or so, I think, per quarter, €16 million.

Good. Thank you.

Yeah. Hello.

I just had a question about China. It does feel like that business used to be the higher margin part of your business, but it could become now the lower margin part of your business just because they’re growing and they seem to be doing auctions and that’s where you do seem to be part of a two-supplier setup.

So do you recognize that pricing pressure should increase in China just because they use these auctions and that that could affect your mix in 2025? Thanks.

Yeah. There is indeed some unction for some product family, but for sure not all of them.

And indeed, when there is unction, there is indeed, as you mentioned, some price pressure. But on the other hand, it’s a very limited part of our volume in China in this situation.

On the other hand, and I was in China during two weeks in September, all our innovation initiatives, innovative products are still very well welcome in China and the goal is always to bring new products, innovative products to avoid the price competition and this new product compensates, let’s say, the products that are more mature. This is a strategy we have always used, and not only in China.

Since the beginning, it’s why we insist so much on the launch of new products. In 2024, we will launch 20 new products on the market.

This is innovation and this is why we are able to keep our profitability. It’s the case in China as it is in the other parts of the world.

And do you expect -- how do you expect the 2025 gross margins pan out then, given that presumably pricing is going to be more of a problem next year and the regional mix is going to be different? What can you say?

Thanks.

Well, we don’t run ahead with guidance on 2024. There is a lot of, yeah, uncertainty in the market.

But what we can say is that, we are also working on our -- yeah, on our supplier base to counterbalance the price erosion that we have always had in the past. So it’s not new price erosion.

But also on the supplier side, we are working on this to limit the impact on our gross margin moving forward.

Yeah. Thanks so much.

We are also launching products that have a better cost structure and it’s also part of the price negotiation. We always try in the price negotiation to get, let’s say, an audit for a change and to be able to provide a chip with a better cost structure in the future.

It’s another example of what we try to get outside the price negotiation.

Thanks a lot.

Yeah. Hi.

Thanks for letting me on again. I just want to clarify, you said that China rose 9% in the first nine months of the year.

How much was China as a percentage of your sales in 2023 and how do you see that developing in 2024 as a percentage of your sales in 2024? And a quick follow-up on the pricing negotiations as well.

You mentioned to a response to the earlier question that you expect pricing to be like it was pre-COVID. Does that mean that you will see a bigger correction now compared to -- because in the last few years, you’ve seen price increases probably and so is this going to be a different kind of negotiation compared to what it was over the last three years?

Yeah. Perhaps I have expressed myself not correctly.

What I wanted to say is that, the price reduction will be at the same level than the price reduction before COVID. I didn’t want to say that we will come back on the pre-COVID price.

It was just about the percentage of price reduction.

Understood. And does that mean that pre-COVID, the price reductions were higher?

Is that the point you’re making?

No. No.

I want to say that pre-COVID we have always had, let’s say, a low single-digit price reduction and I do believe that it will be similar.

Understood. And then on China?

Yeah. On China, in 2023, it was 26% of our revenue, and now, year-to-date, in 2024, it is a bit more than 27% of our revenue.

Thank you very much.

Thank you. Thank you for all the questions and for the discussion.

And I’m looking forward to discuss again with you during the Q4 result and the full year result that will be the 5th of February in 2025

Thank you all of you.